Question

Why are wages considered to be "sticky," and why would sticky wages make unemployment even worse at the beginning of a recession?

Answer 1

Answer:

In the beginning of recessions, the nominal wage does not decrease because of the stickiness of wages and then, the companies start to fire their employees to cut costs without reducing the wages paid to the remaining employees.

Explanation:

The theory of Sticky Wage indicates that pay of employees tends to have a slow response to the changes in the performance of a company or the economy. Stickiness - the ability of economic variables to resist change. For example, it is often said that in sticky wages, nominal wages are tough in the short run. Market forces may reduce the real cost of labor in industry, but nominal wages will tend to stay at the previous level in the short run. This can be justified by institutional factors, such as price regulation, the obligation to fulfill contracts, labor unions, human perseverance or need, personal interest, etc. Sticky wages play an important role in Keynesian economic theory, especially in new Keynesian theory.  They suggest that markets are unable to balance, as prices are not able to decline to an equilibrium level when demand falls. Economists also believe that sticky wages and prices are responsible for the existence of unemployment. Employment ratios are affected by sticky wages and job market disruptions. For example, in the recession, the nominal wage did not decrease because of the stickiness of wages. Instead, the companies fired their employees to cut costs without reducing the wages paid to the remaining employees. Then, as the economy begins to recede, both wages and employment will remain sticky. Companies often hesitate to hire new employees, although hiring new employees often represents a shorter cost than higher wages, as it may be difficult to determine when the recession will end. In this context, employment can often be "sticky" after the recession. On the other hand, according to the theory, wages often fall, and workers who do so can see a rise in wages.